SocGen: Bazookas & Earthquakes Ahead for EM?

By Dimitra DeFotis

So says Benoit Anne, head of emerging market strategy at Societe Generale. In 2013, a Bank of Japan “policy bazooka” triggered a remarkable EM rally, “but as we all remember too well, it ended in tears. Nothing to do with the BOJ of course, but with the Fed coming to the fore with the Bernanke earthquake signal.” But, Benoit says, this time is different:

“First of all, my sense is that EM positioning had reached extreme levels back in early 2013 and we are still nowhere close to those. Likewise, valuations in EM, be it in rates or foreign exchange, had become overstretched. More importantly, I don’t think that the current Fed Chair will produce a Bernanke-like signal that will catch everybody by surprise over the next couple of months. Yes, the Fed will have to tweak its communication at some point, but I am going to start worrying about that much later. For now, I am sticking to my scenario of GEM generally grinding stronger over the next few weeks, although reading the fine print will also be important. Favour EM fixed income over EM FX. In EMEA, favour CEE over the Turkey/Russia infernal duo, and in Latin America, sit tight and wait for the election outcome in Brazil. Yes, the balance of risk suggests U.S. Treasury yields going higher, especially with the 10-year at 2.36%, but that, to me, helps provide support to all those compression trades that I like. At 355bp for the 10-year TIIE vs. its U.S. counterpart, this still looks good, especially if you bear in mind that Mexican local rates will unlikely overshoot the U.S. rates moving higher in a non-extreme global risk environment. … I would be tactically bullish on [Hungary's currency] while my G10 colleagues are telling me that there is further downside to the EUR.“

About Emerging Markets Daily

Emerging markets have been synonymous with growth, but the outlook for individual nations is constantly changing. Countries from Brazil and Russia to Turkey face challenges including infrastructure bottlenecks, credit issues and political shifts. The Barrons.com Emerging Markets Daily blog analyzes news, data and research out of emerging markets beyond Asia to help readers navigate the investment landscape.

Barron’s veteran Dimitra DeFotis has been blogging about emerging market investing since traveling to India and Turkey. Based in New York, she previously wrote for Barron’s about U.S. equity investing, including cover stories and roundtables on energy themes. Dimitra was among the first digital journalists at the Chicago Tribune and started her career as a police reporter at the Daily Herald in the Chicago suburbs. Dimitra holds degrees from the University of Illinois and Columbia University, where she was a Knight-Bagehot Fellow in the business and journalism schools.